Cumberland Is Sticking With High Quality Munis

By Amey Stone

The municipal bond world has had more than its share of negative headlines lately. Chicago’s pension fix was thrown out, New Jersey’s finances are deteriorating and Puerto Rico is devolving into full-fledged financial chaos this week.

In a Tuesday commentary, the firm’s chairman and chief investment officer David Kotok notes that, despite some specific risks, history shows that all states eventually pay their obligations. Plus, credit rating agencies are holding states accountable for letting their credit deteriorate. He writes:

There is a huge distinction between the highest-grade state credits, which are properly rated AAA by the rating agencies, and the lowest-ranked credits, such as those of Illinois and New Jersey. The raters are watching the deterioration of credit quality. They do not see that a default by a state is immediate or imminent. But they do see a reduction in political will to address the credit problem.

His advises investors to stick with high quality munis — and with portfolio managers that don’t try to boost yields with low-rated munis. He writes:

We prefer getting paid with minimal credit risk as opposed to taking on more risk. So our credit standard is higher than that of the benchmark indices, and therefore our managed portfolios have a slightly lower yield than those benchmarks… Others favor taking more risk. And still others take it but do not make that course clear to the client. Therein lies an issue of integrity and disclosure.

He concludes:

At Cumberland, we continue to believe that the higher-credit-quality, tax-free municipal bond with a yield of about 4% and a credit standard of AA to AAA is one of the cheapest debt securities in the world. We own them, and we buy them for our clients.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.